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May 22, 2018

Credit profile reaffirmed as B3 stable: Moody’s sees CPEC as catalyst to growth


May 22, 2018

KARACHI: Moody’s Investors Service on Monday termed multibillion dollars China-Pakistan Economic Corridor (CPEC) projects as a catalyst to the country’s economic growth, but said CPEC-related imports and fiscal costs could worsen fragile external payment position and add to debt burden.

“We continue to expect robust economic activity, driven by investments related to the CPEC,” the US credit ratings agency said in a report. “The high-level of imports, largely because of CPEC, continues to exert pressure on the external account.”

Moody’s said CPEC has the potential to significantly improve Pakistan’s competitiveness and raise potential GDP growth by relieving supply-side constraints and catalysing private sector investment over the next three to five years.

“We assume a gradual economic impact, though full implementation of projects over the next few years could have a greater effect than we expect,” it added. “On the other hand, project implementation could be slower than we envisage or less effective at generating productivity gains.” Moody’s Investors Service pointed at several challenges circling around Pakistan’s economy, including a fragile external payment position and government’s narrow revenue base, weak physical and social infrastructure weighing on economic competitiveness. “Pakistan’s (B3 stable) credit profile is supported by the country’s robust performance and potential, a large – but low-income – economy, and an improved track record of reforms that started under its 2013-16 International Monetary Fund (IMF) program,” the credit rating agency said. “These strengths have been accompanied by greater transparency and lower levels of inflation and inflation volatility.”

Moody’s, however, said credit challenges include the country’s high general government debt burden and low debt affordability, weak physical and social infrastructure weighing on economic competitiveness, a fragile external payments position, and high political risk.

“In particular, the government’s very narrow revenue base restricts fiscal flexibility and weighs on debt affordability,” it added. “The moderate but rising level of external government debt also exposes the country’s finances to sharp currency depreciations.” The credit ratings agency said the stable outlook reflects balanced risks to the country’s credit profile.

“On the upside, there is potential for further strengthening in growth beyond our current expectations, as successful implementation of the CPEC project has the potential to transform the Pakistani economy by removing infrastructure bottlenecks and stimulating both foreign and domestic investment,” it added.

“On the downside, the fiscal costs related to the project could raise Pakistan’s debt burden more rapidly and significantly than we expect, and persistently high levels of imports could develop into greater external vulnerability.”

Moody’s said a fundamental strengthening in the external liquidity position and a significant reduction in the government deficit and debt burden might trigger an upgrade in economic outlook. “Sustained progress in structural reforms that significantly reduce infrastructure impediments and supply-side bottlenecks, thereby improving Pakistan's investment environment and aiding an eventual shift to sustained higher growth, would also be credit positive.”

The credit rating agency warned that a downgrade might stem from “a stalling of the government’s post-IMF program economic reform agenda, material widening of the fiscal deficit, worsening of the external payments position, loss of multilateral/bilateral support, or renewed political instability”.

The ratings agency estimated the nominal GDP of Pakistan’s economy at $305 billion in fiscal 2017 – the third largest among sovereigns in B rating category – which affords the country resilience to local and external shocks. Pakistan also fares better in GDP growth among its peers with 5.8 percent growth in fiscal 2018, as compared to the median 2017 growth of 3.8 percent among B rated sovereigns. Moody’s expected the country to maintain the growth momentum in the next fiscal too.

The ratings agency expected fiscal deficit to remain around 5.5 percent of GDP in fiscal 2018 on the back of strong revenue collection in the first six months which witnessed a 20 percent rise as compared to the corresponding year-earlier period.

Moody’s further said the country is vulnerable to climate change risk like many of its south Asian neighbours.

“The magnitude and dispersion of seasonal monsoon rainfall continues to influence agricultural sector growth and rural household consumption,” it added. “As a result, both droughts and floods can create economic and social costs for the sovereign.”

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